<PAGE>

                                                                    EXHIBIT 10.3

                             STOCK OPTION AGREEMENT

     STOCK OPTION AGREEMENT dated June 10, 2005 between MACKINAC FINANCIAL
CORPORATION (the "Company") and ERNIE R. KRUEGER (the "Optionee").

                                    RECITALS:

     A. The Company and Optionee are parties to an Employment Agreement dated as
of December 15, 2004, as amended (the "Employment Agreement"), providing for the
employment of the Optionee by the Company.

     B. The Employment Agreement provides for the Optionee to be awarded options
to purchase from the Company Five Thousand (5,000) shares of the Company's
Common Stock (the "Option Shares") at a purchase price per share equal to 100%
of the Fair Market Value (as defined in the Plan) of such share (the "Exercise
Price"). Such options are to be issued under and in accordance with the terms
and conditions of the Company's 2000 Stock Incentive Plan (the "Plan"), the
Employment Agreement and this Agreement.

     C. The Directors of the Company have approved the Employment Agreement,
including awarding the Optionee options to purchase the Option Shares in
accordance with the Plan, the Employment Agreement and this Agreement.

     IT IS HEREBY AGREED AS FOLLOWS:

     1. Grant of Option: Effectiveness. Subject to the terms of the Plan and
this Agreement, the Company hereby grants and awards to Optionee the right and
option to purchase all or any of the Option Shares upon payment to the Company
of the Exercise Price per share as hereinafter provided.

     2. Vesting, (a) The right and option to purchase 20% of the Option Shares
shall vest and be exercisable beginning on the date hereof and continuing
through the balance of the Option Term (as hereinafter defined). The options for
the remaining 80% of the Option Shares shall vest and be exercisable in
increments of 20% of the Option Shares in each of the Measurement Periods (as
hereinafter defined) during the Option Term in which the Company meets or
exceeds the profitability goals ("Targets") set by the Board of Directors for
any such Measurement Period. In the event the Targets are not met for any
Measurement Period, the 20% increment which did not vest shall be carried
forward to subsequent Measurement Periods and shall vest if the Target's for any
such Measurement Period are met. As used herein, a "Measurement Period" shall
mean a fiscal year of the Company during which the first and each succeeding
anniversary of this Agreement shall occur.

          (b) Notwithstanding the foregoing vesting schedule, but subject to the
terms of Section 3, all unvested options for Option Shares shall vest and become
immediately exercisable upon: (i) termination of the Employment Agreement by the
Company for any reason other than Cause (as defined in the Employment
Agreement); (ii) Optionee's Retirement (as defined in the Plan), or early
retirement or resignation with the consent of the Company as contemplated by

<PAGE>

Section 10(a) and (b) of the Plan; (iii) the death or disability of the
Optionee; or (iv) a Change of Control (as defined in the Plan) of the Company.

     3. Option Period. Subject to the terms of this Agreement (including Section
2), the options may be exercised and Option Shares may be purchased at any time
and from time to time beginning on the first day after the date hereof and
ending on and prior to the tenth anniversary of the date hereof (the "Option
Term"), subject to the following;

          (a) If the Employment Agreement is terminated as a result of the death
or disability of the Optionee, the options then vested shall remain exercisable
until the earlier of (i) the last day of the 36th month after the month the
Employment Agreement is terminated, or (ii) the expiration of the Option Period;
and

          (b) Any vested and unexercised options shall expire at the time the
Employment Agreement is terminated for Cause (as defined in the Employment
Agreement).

          (c) Except for early retirement or resignation with the consent of the
Company as contemplated by Section 10(a) and (b) of the Plan, any unexercised
options shall expire at the time the Employment Agreement is voluntarily
terminated by the Optionee.

     4. Procedure for Exercise. Subject to conditions of this Agreement, the
options may be exercised at any time and from time to time during the Option
Period by delivering written notice to the Company, signed by Optionee, an
Authorized Transferee, or post-death representative, specifying the number of
Option Shares to be purchased.

     5. Payment of Option Price. The purchase price for the Option Shares shall
be paid in full in cash.

     6. Transferability of Options. Except as otherwise provided in this
Section, the options shall not be sold, pledged, assigned, or transferred in any
way, nor be assignable by operation of law or be subject to execution, levy,
attachment or similar process. Except as provided in this Section, any attempted
sale, pledge, assignment or other transfer contrary to the terms hereof, and any
execution, levy, attachment or similar process, shall be null and void and
without any effect. Notwithstanding the foregoing, the options shall, subject to
the conditions set forth in this Section, be transferable by the Optionee by
gift or other transfer that involves no payment of consideration to the Optionee
to the Optionee's spouse and/or the descendents or to a trust created primarily
for the benefit of the Optionee, the Optionee's spouse and/or the Optionee's
descendents ("Authorized Transferee"). An Authorized Transferee shall have no
right to transfer the options. An Authorized Transferee shall succeed to all
rights and benefits (except the right to further transfer the options) and be
subject to all obligations, conditions and limitations of the Optionee. However,
such rights and benefits (except the rights to further transfer the options) and
obligations, conditions and limitations shall be determined as if the Optionee
continued to hold the options, and the provisions of this Option Agreement
dealing with termination of the Employment Agreement, Retirement, disability and
death of an Optionee continue to refer to the Optionee regardless of whether the
options are or are not transferred to an Authorized Transferee. In order to
transfer options, the Optionee must first give prior written notice to the
Company stating the name, address and tax identification or social security
number


                                       2

<PAGE>

of the proposed transferee and the relationship of the proposed transferee to
the Optionee. The option may not be transferred if the transfer would constitute
a violation of any applicable federal or state securities or other law or
regulation.

     7. Conformity with Plan and Employment Agreement. Except as otherwise
provided herein, the options are subject to all applicable provisions of the
Plan which is incorporated herein by reference. Any matters not addressed herein
or in the Employment Agreement shall be governed by the terms of the Plan.

     8. Adjustments. The Company shall make appropriate and proportionate
adjustments to the number of Option Shares and the Exercise Price to reflect any
stock dividend, stock split, or combination of shares, merger, consolidation, or
other change in the capitalization of the Company, as provided in Section 13 of
the Plan. In the event of any such adjustment, all new, substituted, or
additional securities or other property to which Optionee is entitled under the
options shall be included in the term "Option Shares."

     9. Postponement of Delivery of Shares. The Company, in its discretion, may
postpone the issuance or delivery of Option Shares upon any exercise of the
options until completion of any then pending registration of such shares under
the Securities Act of 1933, as amended ("Securities Act"), covering the resale
of such securities by Optionee.

     10. Rights as a Shareholder. The Optionee shall have no rights as a
shareholder with respect to any Option Shares until the Optionee becomes the
holder of record of such shares.

     11. Further Actions. The parties agree to execute such further instruments
and to take such further actions as may be reasonably be required to carry out
the intent of this Agreement.

     12. Notice. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party hereto at the address as
such party may designate by written notice to the other party.

     13. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company and, subject to the
restrictions on transfer set forth herein, be binding upon and inure to the
benefit of Optionee's personal representatives, successors and permitted
assigns.

     14. Governing Law. This Agreement and all documents contemplated hereby,
and all remedies in connection therewith and all questions or transactions
relating thereto, shall be construed in accordance with and governed by the laws
of the State of Michigan.

                      [THIS SPACE INTENTIONALLY LEFT BLANK]


                                       3

<PAGE>

MACKINAC FINANCIAL CORPORATION


By: /s/ PAUL D. TOBIAS
    ---------------------------------
    Paul D. Tobias
Its: Chairman and Chief Executive
     Officer


OPTIONEE:


/s/ ERNIE R. KRUEGER
-------------------------------------
Ernie R. Krueger
Senior Vice President and Controller

DATED: June 10, 2005